Supreme Court Closes the Door, Mostly, to Class Action Arbitrations

Contracts around the country, concerning every manner of commercial transaction from employment matters to real estate acquisition to consumer purchases, increasingly include a requirement that disputes will be resolved through private arbitration.  These agreements require the private resolution instead of traditional, public litigation in state or federal court.

Yesterday, in Lamp Plus v. Varela, a closely divided US Supreme Court extended the sweep of arbitration clauses in contracts. Unless the arbitration provision explicitly provides that the parties consent to a “class action” arbitration, arbitration clauses in contracts will provide for only an individual “solo” claim to be litigated.

Generally speaking, the parties to a contract can negotiate an agreement to whatever terms they wish so long as they don’t run afoul of some law. One of the permissible terms in an agreement is that disputes over the agreement will be resolved privately, in an arbitration, instead of publicly, in courts. People and businesses often prefer arbitration over public court hearings for a variety of reasons. Privacy interests can be more readily preserved in the private proceedings.  Arbitrations often, but not always, happen faster and less expensively than traditional court litigation. The parties in arbitrations can negotiate the rules of procedure that govern the proceeding in ways that they can’t in court litigation.

That said, for some litigants, giving up the right to litigate in court matters. For example, there are discovery opportunities, including the ability to have court-ordered discovery, that don’t exist to the same extent in private arbitrations.  Some litigants are less concerned about the dispute being resolved privately and, in fact, want the public to be able to know of a dispute.

The Federal Arbitration Act requires courts to enforce arbitration agreements by sending lawsuits back to arbitration if thedispute is governed by an arbitration clause in a contract.

In yesterday’s case, Mr. Varela, an employee of the Lamp Plus, wanted to sue the company. A hacker broke in to Lamp Plus’s computer network, stole Varela’s personal information, and used the information to file a fake tax return in Varela’s name.  Varela’s employment contract include an arbitration clause. He sued in court anyway. Lamp Plus moved to have the case sent to arbitration.

The lower courts agreed the case should be arbitrated, but there was a catch.

The catch, from Lamp Plus’s perspective, was that the arbitration wouldn’t just pit Varela, on his own, against Lamp Plus.  Instead, the lower courts agreed that because Varela’s employment agreement with Lamp Plus was ambiguous, Varela could initiate a “class action” arbitration.  In a “class action” arbitration, Varela could join his claim with those of fellow employees whose records were hacked and exploited. Varela, no doubt, figured he’d have more leverage, and litigation luck, if he could aggregate lots of claims against Lamp Plus in arbitration instead of riding out against the company on his own.

Ultimately, it was on the subject of whether the arbitration would be a “solo” case or a “class action” that Varela and Lamp Plus disagreed.

Varela argued that his employment agreement didn’t say anything about waiving class action rights in the arbitration.  For that reason, he argued, he never agreed to give up class action rights. His position in the Supreme Court was that even though his class action would have to be litigated in a private arbitration instead of in public court, at least he would still be able to fight in a class action.

Lamp Plus countered that class actions are a giant procedural device in any piece of litigation. They completely change the scope of litigation.  They can be expensive, difficult to administer, and interject a whole new set of fights in a dispute including whether the class should even be certified at all. Lamp Plus’s position was that, unless an arbitration agreement is explicit that the arbitration can include class actions, the agreement should be construed to prohibit them.

Chief Justice Roberts, writing for a five Justice majority, agreed with Lamp Plus. He emphasized that arbitration provisions are like other contractual provisions. They should be construed to give meaning to what the parties consented to in their arbitration agreement.  In the absence of an affirmative agreement that an arbitration might include class action litigation, the Court will not require that class actions be litigated in private arbitrations.

The case generated separate dissents by Justices Ginsburg, Breyer, Kagan, and Sotomayor. They all were concerned that arbitration clauses were keeping consumers and employees, who typically have less bargaining power in negotiating contracts with large companies, unfairly shut out of the courts and deprived of procedural remedies. They would have permitted Varela’s class action in arbitration on the ground that Varela had not consented to waive his class action rights.

Lamp Plus is an interesting case for at least one other reason. The case addresses an often mentioned principle of contract interpretation: ambiguous contracts are construed against the drafter.  This principle comes up when there’s an ambiguous provision in a contract.  Generally, it’s used to argue that if there’s some uncertainty in a contract,  then the uncertainty ought to be resolved in favor of the person who had the least power in drafting the contract. The Supreme Court in Lamp Plus made clear that this principle is a rule of last resort. Only in the event of real ambiguity that cannot otherwise be clarified by a close reading of the contract should the terms of a contract be construed against the party to a contract who drafted the agreement.

The upshot of Lamp Plus is that arbitration agreements remain enforceable by the Federal Arbitration Act.  More than that, class actions are unavailable in arbitration unless there’s an explicit agreement to permit them.  Contract negotiators would do well to remember that, when it comes to arbitration, the scope of the agreement to arbitrate will be defined not just by what, but how, the parties have consented to arbitrate. Consumer and employee advocates should know the current Supreme Court is going to give the Federal Arbitration Act teeth. Arbitration agreements mean not just what they say, but sometimes a little more than what they say.